Sunday, February 8, 2015

What ELA Means for Greece

… The ECB really didn’t have much option but to do what it did. Syriza’s strategy was all over the place … At the end of the first ten days, they had said that they were defaulting, but not defaulting, that they didn’t want to borrow any more money, except maybe EUR10bn of treasury bills, that there would be no debt reduction, except that this was a euphemism for “yes there will”, and primary surplus would be maintained, although this didn’t necessarily mean any change in tax or spending plans. They’d also emphasised that they wanted to get a deal with the troika, but were not prepared to talk to the representatives of the troika.

When a borrower starts behaving like this, the natural instinct of any creditor who knows what they’re doing is to “shorten the leash”. … That’s the reasoning behind the collateral changes and the moves toward restricting ELA.

But everyone is worried about this, because ELA and its controls have always been seen as something of a nuclear threat — a policy lever that can never be pulled because the consequences are so drastic.

How drastic? People are envisioning immediate runs on Greek banks if ELA is stopped.

Alternatively, it’s possible that the ECB has no intention of cancelling ELA. Instead, they are using it as pressure to get Syriza to sacrifice domestic bank depositors in order to pay its debts. This is kind of what happened in Cyprus two years ago.